Fortnightly - New Jersey Division of Rate Counselhttp://www.fortnightly.com/tags/new-jersey-division-rate-counsel
enCapacity Roulettehttp://www.fortnightly.com/fortnightly/2011/07/capacity-roulette
<div class="field field-name-field-import-deck field-type-text-long field-label-inline clearfix"><div class="field-label">Deck:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Out of market means out of luck—even for self-supply.</p>
</div></div></div><div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Bruce W. Radford</p>
</div></div></div><div class="field field-name-field-import-category field-type-text field-label-inline clearfix"><div class="field-label">Category:&nbsp;</div><div class="field-items"><div class="field-item even">Commission Watch</div></div></div><div class="field field-name-field-import-bio field-type-text-long field-label-inline clearfix"><div class="field-label">Author Bio:&nbsp;</div><div class="field-items"><div class="field-item even"><p><b>Bruce W. Radford</b> is publisher of <i>Public Utilities Fortnightly</i>.</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - July 2011</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>“The sky did not fall,” according to the power plant developer CPV Power, when earlier this year, the New Jersey Board of Public Utilities completed its highly controversial RFP solicitation for new electric capacity. The BPU snagged more than 1,900 MW, in the form of three new planned generating units, including CPV’s own proposed Woodbridge project, in a process authorized by the state legislature and designed specifically to short-circuit the FERC-approved PJM regional capacity market, known as RPM (reliability pricing model.)</p>
<p>The plan was partly to guard against possible brownouts threatened as early as 2012 (according to PJM’s own projections), but also to flood the PJM regional capacity market with below-cost bids, in a move seen by some as state-sponsored price manipulation to help lower future power prices for the state’s beleaguered ratepayers.<i> (See “<a href="http://www.fortnightly.com/fortnightly/2011/02/capacity-contest">Capacity Contest</a>,” and “<a href="http://www.fortnightly.com/fortnightly/2011/02/parochial-power-play">Parochial Power Play</a>,” both by Michael T. Burr, Fortnightly, Feb. 2011.) </i></p>
<p>But as events turned out, those three new planned units opted not to bid in PJM’s recently conducted May 2011 base residual auction, to procure capacity commitments for delivery during the period 2014 through 2015. Without the threatened below-cost bids, the immediate crisis was averted. As PJM reported on May 15, capacity prices for delivery three years out still fell slightly in northern New Jersey, the region’s highest-priced and most transmission-congested sector, dropping about $20, to $225/MW-day, owing to a large influx of demand response bidders.</p>
<p>And now PJM also questions whether there ever was “a high likelihood” of customer brownouts for the Garden State.</p>
<p>On June 17, the New Jersey BPU held hearings on the continuing question of whether the RPM was allowing the state’s utilities to procure enough capacity to maintain adequate electric supply and reliability. The purpose was to examine whether to solicit new generating capacity beyond the 2,000 MW sought through the above-mentioned RFP under the state’s Long-Term Capacity Agreement Pilot Program, and to deal with delays over U.S. Park Service permitting for the planned and urgently needed 500-kV Susquehanna-Roseland transmission line upgrade. <i>(Investigation of Capacity Procurement &amp; Trans. Planning, Order of May 16, 2011, Dkt. EO 11050309.)</i></p>
<p>In comments submitted June 17 for that hearing, PJM’s v.p. for state member services, Denise Foster, reported that demand response bidding in the recent May 2011 RPM auction had blunted some of the reliability concerns:</p>
<p>“The Board need not draw the extreme conclusion that brownouts absolutely will occur and will do so frequently. However, the Board has drawn the right conclusions that the risk of brownouts, while not imminent, is increasing.”</p>
<p>Nevertheless, the threat that New Jersey might attempt to suppress the RPM price artificially by more than $1 billion in the first year alone—according to warnings from the group known as “P3” (PJM Power Providers)—led FERC in mid-April to pre-empt any possible collateral damage. And so FERC issued one of its most controversial orders in years: the so-called “MOPR” order, which redefined PJM’s Minimum Offer Price Rule, which deters uneconomic, below-cost bidding. <i>(Dkts. ER11-2875, EL1-20, Apr. 12, 2011, 135 FERC ¶61,022.)</i> The commission followed up the very next day with a similar companion order covering New England and its Forward Capacity Market. <i>(Dkts. ER10-787, et al., Apr. 13, 2011, 135 FERC ¶61,029.) </i></p>
<p>Together these two rulings promise a new paradigm, as FERC itself announced, one that could impose a virtual prudence review of the costs of utility owned generation, conducted by federally regulated transmission grid operators and their IMMs (independent market monitors).</p>
<p>That prospect prompted American Public Power Association General Counsel Sue Kelly to write to FERC to express “deep and abiding concerns.” The MOPR, she wrote, and its companion order from New England, together were being “widely interpreted as showing a fundamental lack of regard for the business models of load-serving entities [LSEs] … and the role of the states in assuring that their own citizens and businesses have access to a reliable and reasonably priced portfolio of electric generation.”</p>
<p>In its key particulars, the MOPR ruling creates a new minimum floor for supply offers that generating plants and other resources (such as demand response aggregators) bid into the PJM capacity market, called the RPM, and eliminates exemptions that previously had sheltered 1) utilities and LSEs planning their own new resources (self-supply) to satisfy resources adequacy rules, and 2) other bids from planned new resources developed in response to a state regulatory or legislative mandate to resolve a projected capacity shortfall. <i>(See, “<a href="http://spark.fortnightly.com/dev-pur/rto-bidding-rules">State’s Rights, Gamed Markets</a>,” Fortnightly’s SPARK.) </i></p>
<p>Also, the MOPR rule applies only to newly planned resources bidding for delivery into transmission-constrained areas, and then primarily to simple-cycle and combined-cycle gas-fired turbines. It won’t apply to wind, solar, nuclear, or coal-fired units, or to IGCCs (integrated gasification, combined-cycle gas-fired turbines), as FERC felt that such resources wouldn’t likely serve as convenient vehicles for price manipulation.</p>
<p>But even more important, the MOPR order defines this new bid floor in terms of a unit-specific cost-indexing benchmark, to be developed by PJM and then applied case-by-case by its independent market monitor (IMM) to specific categories of resources. That means that a utility directed by its state PUC to develop and build a particular portfolio of generating resources to self-supply capacity to provide for resource adequacy could see its bid disallowed, with its resource failing to clear in the regional capacity market, thus forcing the utility to cover the shortfall and purchase third-party resources at the clearing price—in effect paying twice over for capacity—if the IMM should find that the utility’s proprietary, self-supplied resource isn’t uneconomic and uncompetitive (“out of market,” or OOM), when measured against other units of the same asset class.</p>
<p>And the New England order does much the same for the region’s FCM construct.</p>
<p>As explained by attorneys Scott Strauss and Jeffrey Schwarz (Spiegel &amp; McDiarmid), representing New Hampshire Electric Co-op, and Massachusetts Municipal Wholesale Electric Co., the April 13 FCM order announces for the first time that new self-supplied resources that meet the relevant technical and locational criteria “may nonetheless fail to clear,” if the bid falls below an offer-floor benchmark.</p>
<p>As Strauss and Schwarz note, that raises the specter of having to pay twice—once to build, and then again to buy through the FCM to cover the resource that is left stranded:</p>
<p>“That was never the deal,” they argued.</p>
<p>“And the commission has no jurisdiction to impose such an obligation upon LSEs.”</p>
<h4>A New Paradigm</h4>
<p>Concerns over OOM projects were rampant long before New Jersey enacted legislation to target the PJM market. As FERC noted in its New England order, every FCM auction since the market’s birth has cleared at the price floor, with more capacity ready to step in and bid at that level. Such low prices, said the commission, arose from bids from out-of-market suppliers that received revenue from sources outside ISO-NE markets, such as through bilateral purchased power contracts, rate base cost recovery, or favorable tax status or financing linked to those revenue streams. These sources of revenue, largely enabled by state policies on ratemaking, resource planning, and portfolio management, tend to make OOM resources indifferent to the market clearing price, and thus willing to offer capacity for virtually any price as a price-taker, especially in New England. In fact, as this column noted last year, the Connecticut state commission as far back as 2007 had attempted to carry out a scheme similar to the New Jersey plan to design RFPs to solicit capacity resources to offer below-cost bids into the New England FCM to drive down prices and avoid “federally mandated congestion charges,” coupled with a contract for differences that would settle against New England markets, to make the suppliers whole.<i> (See, “<a href="http://www.fortnightly.com/fortnightly/2010/05/when-markets-fail">When Markets Fail</a>,” Fortnightly, May 2010.) </i></p>
<p>As in PJM, FERC’s New England order imposed offer-price controls on all self-supplied capacity. In FERC’s view the innocent self-supply of capacity outside the FCM auction carried with it the same price-distorting effects as zero-price bidding by OOMs, “regardless of intent.” FERC also denied arguments that cost benchmarking for self-suppliers worked a taking of property under the Fifth Amendment:</p>
<p>“In the era of <i>Hope and Bluefield</i> … it was necessary to require that the utility was able to recover its costs …</p>
<p>“Today, however, the commission regulates under another paradigm.”</p>
<p>Yet earlier this year FERC flip-flopped on the question of a different state-sponsored incentive to bring down capacity prices: that is, whether the New York ISO should recognize the value of certain tax abatements offered to power plant developers to induce installation of peaking units in New York City in the course of calculating the “net CONE” parameter (cost of new entry) for the administrative demand curve used to set in-city prices for installed capacity (ICAP).</p>
<p>At first, FERC had rejected the NY ISO’s decision to recalculate CONE and bend the market to honor the tax abatements as economic, noting that it was in New York city’s interest to grant tax abatements to locally installed peaking units “because doing so would result in lower capacity prices.” <i>(See, Dkt. ER11-2224, Jan. 28, 2011, 134 FERC ¶61,058.) </i></p>
<p>But that drove the mayor of New York City and various federal and state legislators to censure FERC’s ruling. U.S. Senator Charles E. Schumer wrote to FERC Chairman Jon Wellinghoff in March, complaining that FERC’s order would “significantly increase the price paid for electricity supply by New York City customers over the next three years.” And in April, New York PSC Commissioner Robert Curry sent an email to FERC commissioner Marc Spitzer, forwarding an April 1 story from the <i>New York Post</i> (“Exclusive: New Yorkers are about to get zapped on their electric bills …”).</p>
<p>“Thought you might be interested,” Curry wrote.</p>
<p>Lo and behold, FERC reversed itself in May, noting that the New York legislature and Governor Cuomo had changed the previously discretionary tax abatement program to “as-of-right.” <i>(Order on Rehearing, Dkt. ER11-2224, May 19, 2011, 135 FERC ¶61,170.) </i></p>
<p>None of this escaped Stephanie Brand, Director of the New Jersey Division of Rate Counsel. She argued that the issue and the result should have been the same in the PJM MOPR case. In other words, in running the regional capacity market, regulators should honor any state-legislated scheme to drive prices down. <i>(Motion of New Jersey Division of Rate Counsel, Dkts. EL11-20, ER11-2875, filed May 27, 2011.) </i></p>
<p>As Ms. Brand noted, “We express no opposition to the commission’s treatment of the New York tax abatement program …</p>
<p>“Instead, we urge the commission to apply the same logic to New Jersey’s effort to incentivize new resources.”</p>
<h4>‘Not a Rate Case’</h4>
<p>FERC’s MOPR order sets out a supposedly objective and quantitative test for determining what makes for an economic supply bid, stating that PJM must set the minimum offer price at the “competitive, cost-based, fixed, nominal levelized, net cost of new entry, were the resource to rely solely only on revenues from PJM-administered markets.”</p>
<p>This rule has drawn flak, however, with opponents claiming that a precise accounting of costs is well-nigh impossible, as many utilities and LSEs often count on intangible benefits when making capacity planning decisions.</p>
<p>In seeking rehearing, NRECA’s David Mohre (executive cirector, energy and power) and Paul McCurley (manager, power supply) cited a host of intangible benefits not captured in by FERC’s MOPR test:</p>
<p>A utility plant owner, they say, might earn excess revenues from selling excess capacity in bilateral deals during those years when excess might have been available before the LSE “grew into the resource.”</p>
<p>They reject the idea that revenues should be deemed inherently uneconomic or anti-market unless derived directly from PJM markets.</p>
<p>According to attorney Randall Speck (Kaye Scholer), representing the Maryland Commission, examples of legitimate cash flows divorced from PJM markets might include investment tax credits, preferential zoning, or taxpayer funding. Speck also highlighted how a state-sponsored resource plan must anticipate climate change and future EPA regulations that could alter the value proposition of resource choices:</p>
<p>Rather than stay silent, PJM has expressed a fair degree of sympathy with the concerns voiced by traditional regulated utilities.</p>
<p>First, in asking for clarification of the MOPR rule, PJM urged FERC to consider a new stakeholder process to seek common ground to allay concerns of utility LSEs—especially the problem of self-supply failing to clear the auction, and whether FERC might develop an optional, less administratively burdensome form of MOPR exception, focused not on inflexible cost benchmarking, but on whether a new gen project relies on improper subsidies, discriminatory payments, or some other form of revenue support that suggests a real intent to suppress prices.</p>
<p>This last idea evoked a similar gen industry proposal from P3 known as the “No Subsidy Off-Ramp,” which FERC summarily rejected in its April 12 order.</p>
<p>But in mid-May PJM went even further, submitting a draft RPM tariff to comply with FERC’s MOPR order that seemed to tilt so far in favor of traditional utilities as to conflict outright with FERC directives.</p>
<p>In setting guidelines for screening below-cost offers by utility self-suppliers, PJM outlined all the different types of supporting documentation it would need to evaluate whether a sell offer should qualify as competitive, but said that wouldn’t amount to conducting a “rate case,” or divining a just and reasonable rate.</p>
<p>Yet PJM promised to credit cost advantages resulting from the seller’s business model, financial condition, tax status, or access to capital, and thus “would not second-guess, or look beyond, an attractive cost of capital enjoyed by a seller simply because it is a franchised public utility in jurisdictions with traditional retail rate regulation, or part of a utility holding company with a large balance sheet and high credit rating.” <i>(PJM Interconnection, Revisions to Open Access Tariff, Transmittal Letter p. 10, Dkt. ER11-2875, filed May 12, 2011.) </i></p>
<p>What now of the equal playing field for merchant generators?</p>
<p>No wonder that independent market monitor Joseph Bowring (president, Monitoring Analytics) protested outright on June 2 that such clarifying language from PJM “is not required by, and does not fall within the scope of compliance with the April 12th Order.”</p>
<p>Within two weeks FERC was entertaining second thoughts.<i> (See Order Granting Rehearing, June 13, 2011, 135 FERC ¶61,228.) </i>And in a clear sign that the wheels had run off the tracks, FERC called for a staff-led technical conference within 45 days to explore issues arising from widespread industry concern that self-supply sell offers would be held subject to the risk of mitigation under the minimum offer price rule.</p>
<p>Why wasn’t that technical conference held <i>before</i> handing down the order?</p>
<h4>A ‘Death Sentence’</h4>
<p>Judging the merits of different financing arrangements could prove especially difficult for market monitors.</p>
<p>Hess Corp., one of the three developers (after CPV and NRG) that answered the New Jersey RFP for low-cost capacity, urged reliance on a standard reference financing structure, rather than allow project developers to put forth individual financing structures for evaluation.</p>
<p>As Hess explained, by knowing where the project costs need to be to clear the RPM market, a developer can engineer an attractive bilateral arrangement with a highly capitalized parent or partner. By producing favorable financing costs, says Hess, this out-of-market bilateral contract “would have the effect of lowering the project’s minimum bid offer and greatly enhancing the project’s ability to clear.”</p>
<p>This creative contracting, Hess added, “is tantamount to tailoring the perceived `economic-ness’ of a project,” so as to pass the MOPR test.</p>
<p>By separately considering each individual project financing, Hess concludes, FERC is placing PJM and the IMM in a “difficult, unnecessary and ill-suited position” of judging out-of-market bilateral deals designed to drive various financing terms and costs. <i>(Protest of Hess Corp., p. 13, FERC Dkt. ER11-2875, filed June 3, 2011.) </i></p>
<p>Another point concerned the degree to which capacity clearing prices do or don’t affect developers and their decisions to build. In short, why put self-suppliers and state-sponsored portfolio programs at risk of not clearing the market, when the clearing price rarely dictates the development decision?</p>
<p>As attorney Stephen Teichler pointed out, in seeking rehearing of FERC’s New England order for clients NStar and United Illuminating, the go/no-go decision often doesn’t hinge on the clearing price.</p>
<p>“Existing generators,” Teichler noted, “can, and do, regularly submit bids into the FCM auctions that are calculated to be accepted.”</p>
<p>As Teichler argued, state-sponsored generation usually will be built on the strength of purchased power agreements, or not all:</p>
<p>“If a resource is going to be built anyway, an economically rational owner will tender a bid into the capacity market that is likely to be accepted.</p>
<p>“Some revenue,” he added, “even if less than full long-run average cost,” is better than none. <i>(Request for Rehearing, Dkts. ER10-787 et al., filed May 13, 2011.) </i></p>
<p>This reasoning led Teichler to conclude that market clearing prices will rarely, if ever, approach the ideal of full, levelized cost:</p>
<p>“A bid at or above $8/kW-month—approximating the cost of new entry for certain types of capacity that may be needed for reliability purposes, for example—virtually ensures that the resource will not be selected, as it is far above recent capacity clearing prices, which are in the $3/kW-month range.</p>
<p>“That a certain resource must consistently bid its cost of entry is presently a death sentence.”</p>
</div></div></div><div class="field field-name-field-article-category field-type-taxonomy-term-reference field-label-above clearfix"><h3 class="field-label">Category (Actual): </h3><ul class="links"><li class="taxonomy-term-reference-0"><a href="/article-categories/ferc">FERC</a></li><li class="taxonomy-term-reference-1"><a href="/article-categories/etrm-markets">ETRM &amp; Markets</a></li></ul></div><div class="field field-name-field-members-only field-type-list-boolean field-label-above"><div class="field-label">Viewable to All?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-article-featured field-type-list-boolean field-label-above"><div class="field-label">Is Featured?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-department field-type-taxonomy-term-reference field-label-above clearfix"><h3 class="field-label">Department: </h3><ul class="links"><li class="taxonomy-term-reference-0"><a href="/department/commission-watch">Commission Watch</a></li></ul></div><div class="field field-name-field-image-picture field-type-image field-label-above"><div class="field-label">Image Picture:&nbsp;</div><div class="field-items"><div class="field-item even"><img src="http://www.fortnightly.com/sites/default/files/article_images/1107/images/1107-CW.jpg" width="1200" height="1500" alt="" /></div></div></div><div class="field field-name-field-fortnightly-40 field-type-list-boolean field-label-above"><div class="field-label">Is Fortnightly 40?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-law-lawyers field-type-list-boolean field-label-above"><div class="field-label">Is Law &amp; Lawyers:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-above clearfix">
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<a href="/tags/american-public-power-association">American Public Power Association</a><span class="pur_comma">, </span><a href="/tags/analytics">Analytics</a><span class="pur_comma">, </span><a href="/tags/cap">CAP</a><span class="pur_comma">, </span><a href="/tags/cash-flow">cash flow</a><span class="pur_comma">, </span><a href="/tags/charles-e-schumer">Charles E. Schumer</a><span class="pur_comma">, </span><a href="/tags/commission">Commission</a><span class="pur_comma">, </span><a href="/tags/cone">CONE</a><span class="pur_comma">, </span><a href="/tags/cpv">CPV</a><span class="pur_comma">, </span><a href="/tags/cpv-power">CPV Power</a><span class="pur_comma">, </span><a href="/tags/david-mohre">David Mohre</a><span class="pur_comma">, </span><a href="/tags/denise-foster">Denise Foster</a><span class="pur_comma">, </span><a href="/tags/epa">EPA</a><span class="pur_comma">, </span><a href="/tags/federal-energy-regulatory-commission">Federal Energy Regulatory Commission</a><span class="pur_comma">, </span><a href="/tags/ferc">FERC</a><span class="pur_comma">, </span><a href="/tags/fortnightlycom">Fortnightly.com</a><span class="pur_comma">, </span><a href="/tags/hess-corp">Hess Corp</a><span class="pur_comma">, </span><a href="/tags/imm">IMM</a><span class="pur_comma">, </span><a href="/tags/interconnection">Interconnection</a><span class="pur_comma">, </span><a href="/tags/iso">ISO</a><span class="pur_comma">, </span><a href="/tags/iso-ne">ISO-NE</a><span class="pur_comma">, </span><a href="/tags/jeffrey-schwarz">Jeffrey Schwarz</a><span class="pur_comma">, </span><a href="/tags/jon-wellinghof">Jon Wellinghof</a><span class="pur_comma">, </span><a href="/tags/jon-wellinghoff-0">Jon Wellinghoff</a><span class="pur_comma">, </span><a href="/tags/joseph-bowring">Joseph Bowring</a><span class="pur_comma">, </span><a href="/tags/kaye-scholer">Kaye Scholer</a><span class="pur_comma">, </span><a href="/tags/lse">LSE</a><span class="pur_comma">, </span><a href="/tags/marc-spitzer">Marc Spitzer</a><span class="pur_comma">, </span><a href="/tags/massachusetts-municipal-wholesale-electric-co">Massachusetts Municipal Wholesale Electric Co.</a><span class="pur_comma">, </span><a href="/tags/monitoring-analytics">Monitoring Analytics</a><span class="pur_comma">, </span><a href="/tags/mopr">MOPR</a><span class="pur_comma">, </span><a href="/tags/new-hampshire-electric-co-op">New Hampshire Electric Co-op</a><span class="pur_comma">, </span><a href="/tags/new-jersey">New Jersey</a><span class="pur_comma">, </span><a href="/tags/new-jersey-board-public-utilities">New Jersey Board of Public Utilities</a><span class="pur_comma">, </span><a href="/tags/new-jersey-division-rate-counsel">New Jersey Division of Rate Counsel</a><span class="pur_comma">, </span><a href="/tags/new-york-psc">New York PSC</a><span class="pur_comma">, </span><a href="/tags/nreca">NRECA</a><span class="pur_comma">, </span><a href="/tags/nrg">NRG</a><span class="pur_comma">, </span><a href="/tags/nstar">NStar</a><span class="pur_comma">, </span><a href="/tags/oom">OOM</a><span class="pur_comma">, </span><a href="/tags/p3">P3</a><span class="pur_comma">, </span><a href="/tags/paul-mccurley">Paul McCurley</a><span class="pur_comma">, </span><a href="/tags/pjm">PJM</a><span class="pur_comma">, </span><a href="/tags/pjm-interconnection">PJM Interconnection</a><span class="pur_comma">, </span><a href="/tags/pjm-power-providers">PJM Power Providers</a><span class="pur_comma">, </span><a href="/tags/pv">PV</a><span class="pur_comma">, </span><a href="/tags/randall-speck">Randall Speck</a><span class="pur_comma">, </span><a href="/tags/rec">REC</a><span class="pur_comma">, </span><a href="/tags/robert-curry">Robert Curry</a><span class="pur_comma">, </span><a href="/tags/rpm">RPM</a><span class="pur_comma">, </span><a href="/tags/scott-strauss">Scott Strauss</a><span class="pur_comma">, </span><a href="/tags/stephanie-brand">Stephanie Brand</a><span class="pur_comma">, </span><a href="/tags/stephen-teichler">Stephen Teichler</a><span class="pur_comma">, </span><a href="/tags/sue-kelly">Sue Kelly</a><span class="pur_comma">, </span><a href="/tags/susquehanna-roseland-transmission-line">Susquehanna-Roseland transmission line</a> </div>
</div>
Fri, 01 Jul 2011 04:00:00 +0000puradmin13538 at http://www.fortnightly.comTreading Waterhttp://www.fortnightly.com/fortnightly/2011/05/treading-water
<div class="field field-name-field-import-deck field-type-text-long field-label-inline clearfix"><div class="field-label">Deck:&nbsp;</div><div class="field-items"><div class="field-item even"><p>With no guidance yet from FERC, Atlantic Wind is forced to wait.</p>
</div></div></div><div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Bruce W. Radford</p>
</div></div></div><div class="field field-name-field-import-category field-type-text field-label-inline clearfix"><div class="field-label">Category:&nbsp;</div><div class="field-items"><div class="field-item even">Commission Watch</div></div></div><div class="field field-name-field-import-bio field-type-text-long field-label-inline clearfix"><div class="field-label">Author Bio:&nbsp;</div><div class="field-items"><div class="field-item even"><p><b>Bruce W. Radford</b> is Publisher of <i>Public Utilities Fortnightly</i> magazine. Contact him at <a href="mailto:radford@pur.com">radford@pur.com</a>.</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - May 2011</div></div></div><div class="field field-name-field-import-image field-type-image field-label-above"><div class="field-label">Image:&nbsp;</div><div class="field-items"><div class="field-item even"><img src="http://www.fortnightly.com/sites/default/files/article_images/1105/images/1105-cw-fig1.jpg" width="1376" height="2341" alt="" /></div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>When April came and went without any decision from the Federal Energy Regulatory Commission on its highly anticipated but even more controversial new rule on regional grid planning, the Atlantic Wind Connection project was left hanging.</p>
<p>In fact, the $5-billion-plus project has been on standby since December, when, with a PR assist from Google, the project sponsors first applied to FERC for lucrative financial incentives to realize the vision of a 300-mile-long undersea, high-voltage DC backbone transmission line running along the Mid-Atlantic coast. The project is intended to foster development of 6,000 MW—or more—of offshore wind-generated power, to be delivered to the PJM regional power grid.</p>
<p>At issue is whether the nation is really committed to a green future, and whether it will agree to building infrastructure in a comprehensive and systematic way, or whether green power development will continue as it has up to now, marked by a series of one-off projects, each one in turn forced to fight the same political battles.</p>
<p>Opponents—and there are many—challenge Atlantic Wind’s bid for financial incentives. But even more importantly, they challenge the very notion of building a transmission line, as they say, “on spec”—of building a backbone grid superhighway designed to serve a myriad of as-yet-unplanned and un-built wind turbine projects.</p>
<p>In truth, the project may be too perfect for its own good. Too novel, that is, to fit conveniently within any recognized regulatory cubbyhole.</p>
<p>Is it needed for reliability? No; not in terms of fixing any system weakness yet identified. Will it shave pennies off electricity prices? Not likely, if you count in the cost of the wind farms that surely must be built before the sponsors will want to go forward. Is it a merchant project, with investors eager to risk their shirts on market whims? Not hardly, as the sponsors say they intend to submit the project to PJM, for inclusion in the grid system’s Regional Transmission Expansion Plan (RTEP), so that approval would make AWC eligible to pass project costs along to ratepayers in the PJM footprint, as provided for by PJM’s federally approved regional transmission tariff.</p>
<p>Rather, Atlantic Wind is designed primarily to assure that Mid-Atlantic states can gather and assemble the green resources they will need to satisfy goals and timelines contained in legislatively mandated renewable portfolio standards—a laudable aim that nevertheless won’t get to first base with PJM grid planners.</p>
<p>That’s because PJM’s RTEP tariff favors only those facilities that are needed for reliability or that will reduce the cost of delivered power by reducing line congestion in the transmission network.</p>
<p>Thus, Atlantic Wind up to now has chosen not to submit its project for approval at PJM, lest it fall through the cracks, without a hook on which to hang its hat.</p>
<p>All this could change, of course, if and when FERC should decide to move ahead with its planned Notice of Proposed Rulemaking (NOPR) in Docket RM10-23. That’s the case in which FERC has proposed that projects like Atlantic Wind, which help further a governmental policy (such as development of renewable power), should win favor from regional transmission planners. That’s the ruling that perhaps someday—if congressional Republicans ever agree to go along—will create a perfect fit for Atlantic Wind and other such projects that aren’t needed in an economic or engineering sense, but only to help states go green.</p>
<p>Until then, Atlantic Wind is left to tread water.</p>
<h4>Key to the Highway</h4>
<p>Described by sponsors as “the first offshore transmission highway in the United States,” the Atlantic Wind Connection (AWC) would be constructed off the coasts of New Jersey, Delaware, Maryland and Virginia, comprising perhaps nine offshore raised platforms to serve as hubs for collection of wind farm energy output, plus 750 or so circuit miles (650 miles offshore, 38 miles in close-in state-controlled waters, and 67 miles onshore), to create two separate and parallel backbone circuits (four 320-kV DC cables). These circuits would be located in two separate rights-of-way running about 20 miles offshore, and separated by enough ocean floor to minimize potential risk of damage from a single unplanned event, such as anchor drag from a passing ship.</p>
<p>The project would enable some 6,600 MW of offshore wind capacity to be developed and integrated into the PJM regional grid on a timetable necessary to allow the region to meet state renewable portfolio standards and other state and federal renewable energy goals.</p>
<p>“The Mid-Atlantic region’s offshore waters hold vast potential for wind energy production,” said Markian Melnyk, president of Atlantic Grid Development (AWC’s development company), at a press conference held on in Washington, D.C., on March 31. That’s the same day that AWC filed what spokesman and Director of Outreach Bryan Lee reported was the first-ever unsolicited right-of-way application with the Department of Interior’s Bureau of Ocean Energy Management, for use of certain areas of the U.S. Outer Continental Shelf to construct an offshore electric transmission system.</p>
<p>“AWC offers a superhighway,” Melnyk added, to allow “large-scale development of this strategically important clean domestic energy resource.</p>
<p>“AWC supports … renewable energy policy objectives … and would enhance the competitive regional electric market by increasing supply options and reducing congestion on existing facilities.”</p>
<p>A key selling point for Atlantic Wind lies in its backbone design and platform hubs, all to be located in federal waters. As noted at the press conference, AWC will take responsibility for procuring all necessary state permits, and for building all transverse ship-to-shore lines needed to interconnect with the interstate grid. Any participating wind farm (or cluster of farms) need only link up with one of AWC’s platform hubs in federal waters, and won’t have to deal with a radial facility interconnection with PJM. The interconnecting party would be AWC.</p>
<p>This backbone design, say the sponsors, is the key to the project. In its application filed at FERC late last year seeking financial incentives, AWC claimed that, “compared to a radial approach [where each wind farm arranges for its own direct connection to the interstate grid network], the AWC project will facilitate offshore wind development on a larger scale and more quickly.” By separating the siting of interconnection lines from the siting of the actual wind farms, AWC would enable wind turbines to be built farther from shore.</p>
<h4>Congestion Relief?</h4>
<p>In its December application, Atlantic Wind sought financial incentives under Federal Power Act sec. 219, and FERC Order 679, which require either (a) prior project approval by the regional grid planner (PJM) or a state permitting agency, or (b) proof that the project is needed to ensure reliability or to reduce the cost of delivered power by reducing grid congestion.</p>
<p>And as AWC hasn’t even applied to be considered in PJM’s regional grid plan, and lacks state permitting approval or proof of any compelling reliability need, it has up to now tried to make a case that it will ease congestion and produce dollar benefits by enhancing regional grid transfer capabilities and lower spot market prices, known as LMPs (locational marginal prices). On this point, however, the returns are mixed.</p>
<p>With help in analysis from The Brattle Group, AWC contends that connecting 6,600 MW of offshore wind via the project would produce $17 billion (net present value) in LMP reductions in PJM over 20 years, as compared with a base case of no offshore wind development. Yet, as the incumbent transmission owners (TOs) in PJM have pointed out, that $17 billion in benefits requires a $35 billion outlay to produce: $5 billion for the project, and $30 billion for the generation (implying a capacity cost of about $4,500/kW).</p>
<p>And while AWC claims annual congestion cost savings of $147 million even without participation from offshore wind, that benefit (a 20-year net present value of about $1 billion) still wouldn’t match the $5 billion cost of the transmission project.</p>
<p>And these numbers don’t take into account that the injection of so much offshore wind could require costly AC system upgrades back on land, or that LMP effects could be offset by hedging deals using financial transmission rights (FTRs).</p>
<p>One group of stakeholders, led by Old Dominion Electric Cooperative, suggests that since project benefits, if any, will come from wind farm development, rather than the line itself, that Atlantic Wind is attempting to “transform the use of risk-reducing transmission incentives into a shield for would-be developers [of offshore wind farms] against the risk inherent in their projects.”</p>
<p>And AWC’s own expert witnesses Johannes Pfeifenberger and Samuel Newell (both Brattle Group principals) seemed to reinforce that point when they testified, “It is unlikely that the project would be constructed without the accompanying development of offshore wind generation.”</p>
<p>Will wind farm projects agree to sign on? One developer, Deepwater Wind Holdings, which plans to locate its Garden State Offshore Energy Project approximately 16 miles off the New Jersey coast, near the proposed path of Atlantic Wind, takes pains to point out that it won’t necessarily participate in the AWC project:</p>
<p>“Deepwater Wind is concerned that the AWC Project may increase the complexity of development of offshore wind.</p>
<p>“While Deepwater may consider the AWC Project as an interconnection option for the GSOE Project, it also is exploring other interconnection options… Deepwater Wind will continue to develop offshore generation, including the GSOE Project, regardless of the existence of the AWC Project.”</p>
<h4>Too Much Backbone?</h4>
<p>For the long run, perhaps the most important question pending in the Atlantic Wind case concerns whether offshore wind farms should connect to the land-based interstate grid via a single backbone grid system, or through individual, project-specific radial tie lines, each fashioned specifically to serve a single wind farm or cluster of closely located turbine projects.</p>
<p>Atlantic Wind touts its backbone design as “a systems approach to transmission planning for offshore wind, rather than the construction of transmission in reaction to sporadic individual generator interconnection requests.”</p>
<p>And Brattle’s Pfeifenberger and Newell argue further:</p>
<p>“It is highly unlikely that the individual radial tie-line approach can produce offshore wind in the quantities needed to accommodate existing RPS requirements, much less produce the economic, reliability, and carbon benefits that the AWC backbone approach provides.”</p>
<p>The AWC project wins support on this point from the Maryland Energy Administration, which states that “backbone subsea HVDC transmission, linking multiple offshore wind farms and energy markets is an excellent way to both decrease the cost of developing an offshore wind farm by eliminating the need to develop individual radial lines … as well as increasing the value of that power by aggregating wind energy over a broader geographic scope of deployment in order to reduce intermittency.”</p>
<p>Yet New Jersey Rate Counsel Stefanie Brand and District of Columbia Interim People’s Counsel Brenda Pennington claim that, if one looks at historic examples, such as the Eastern and Western Interconnections, and even natural-gas gathering systems in the Gulf of Mexico, that energy resource development “commonly proceeds radially, with a looping overlay added later if and only if the radial development succeeds.”</p>
<p>Brand and Pennington in effect argue that the generation should come first, and transmission second:</p>
<p>“A coastwise configuration,” they claim, “amounts to a centrally planned, multi-billion-dollar societal bet on the future economics of far-offshore wind.</p>
<p>“In contrast,” they argue, “a radial configuration, by linking transmission siting to generation siting, relies on the market’s forecast of future wind generation sales.”</p>
<p>Most remarkable is the fact that Atlantic Wind and its protesters each seize on the existence of state laws promoting renewable energy and offshore wind as evidence for its own particular theory: be it backbone or radial.</p>
<p>Thus, New Jersey’s Brand and D.C.’s Pennington point out that state policymakers so far have adopted laws that would favor individual, project-specific wind installations with radial interconnections to the mainland grid, in a way that allows state regulators to link offshore wind development with particular rate-making stipulations or funding mechanisms that balance cost and risk with state-specific economic goals. A backbone system, they argue, “could be seen as side-stepping the state regulatory ratemaking treatment,” thereby “undermin[ing] state offshore wind policies.”</p>
<p>They offer expert witness testimony from economist David Dismukes, who cites certain “hard-fought” agreements ironed-out by state politicians—deals he says would have to be “re-entered” to accommodate a comprehensive backbone grid design, as proposed by Atlantic Wind.</p>
<p>According to Dismukes, most states to date are considering the use of direct, long-term purchased power contracts with required power deliveries to the state’s onshore power grid to securitize offshore wind generation projects. By contrast, the Atlantic Wind grid project itself would provide offshore grid system hubs that would collect wind farm output and handle interconnection service to the mainland grid, but with no apparent guarantees regarding how much wind output would be delivered ultimately to individual states.</p>
<p>Other states, Dismukes notes, like New Jersey and Maryland, seek to tie project financial support directly to the delivered energy and environmental attributes of the projects.</p>
<p>For example, as Dismukes notes, the New Jersey Offshore Wind Economic Development Act (OSWEDA) creates a system of offshore wind renewable energy certificates plus an “Offshore Alternative Compliance Payment.” The OACP, Dismukes claims, creates a “backstop” or “circuit breaker” on development costs that wouldn’t likely exist under the formula rate plan proposed by the AWC companies. Also, he notes, AWC’s requested financial incentive for rate recovery of construction work in progress (CWIP) wouldn’t jive with rules in the New Jersey legislation that allow financial support for offshore wind only upon commercial operation.</p>
<p>In short, Dismukes claims that “the terms and conditions for state offshore wind policy support have come from long and often contentious debates, as well as inputs from a wide range of stakeholder groups.” <i>(See, Affidavit of David E. Dismukes, on behalf of New Jersey Division of Rate Counsel, FERC Docket No. EL11-13, filed Jan. 31, 2011.) </i></p>
<p>Nevertheless, The Atlantic Wind companies see these same facts and draw an entirely different conclusion.</p>
<p>Citing the same New Jersey legislation, as well as laws enacted or pending in Delaware, Maryland, and Virginia, AWC argues that development needs are best met through a comprehensive backbone system that would traverse the entire mid-Atlantic region, and which would be integrated with a region-wide grid plan.</p>
<p>According to AWC, developers such as Apex Offshore, Fishermen’s Energy, and Deepwater Wind “are interested in an offshore backbone transmission project, like the AWC Project, with which to interconnect their proposed wind farms.”</p>
<p>The “bottom line,” says AWC, is that “PJM must decide how best to plan for connecting this energy to the grid.”</p>
<p>Quoting from the Joint Strategic Plan of the U.S. Interior and Energy Departments, AWC claims that “the implications for adding large amounts of offshore wind generation to the power system need to be better understood to ensure reliable integration and to evaluate the need for additional grid infrastructure such as an offshore transmission backbone.” <i>(See, Answer of AWC Companies, FERC Docket EL11-13, filed Feb. 15, 2011.)</i></p>
<h4>Forcing the Issue</h4>
<p>When asked about Atlantic Wind’s plans in mid-April, spokesman Bryan Lee confirmed that AWC doesn’t intend to apply to PJM to win approval of its project in PJM’s RTEP before the FERC releases its NOPR decision on transmission planning for so-called “policy-driven” grid projects—projects that fall through the cracks, like AWC, because they can’t point to needed reliability or pricing benefits, but claim to help advance state or federal energy policy. Such a ruling by FERC would give PJM the go-ahead to give planning consideration to such policy projects.</p>
<p>However, it turns out that PJM since last year has been hedging its bets—exploring for itself, without direction from FERC, whether it should revise its grid planning process on its own to consider giving weight to public policy needs.</p>
<p>After all, the Midwest and California grid systems already have won partial approvals from FERC to implement planning schemes that consider policy-driven projects alongside those that address reliability or grid congestion.</p>
<p>In fact, last year PJM asked its Regional Planning Process Task Force (RPPTF) to evaluate and make recommendations to implement additional transmission planning criteria or procedures to include a broader range of assumptions that would be required to plan for public policy initiatives, such as renewable resource integration.</p>
<p>And, at a meeting this past January of PJM’s Transmission Owner’s Agreement Administrative Committee (TOA-AC), PJM staff stated that they were moving ahead on the idea despite legal uncertainty about the scope of PJM authority in this area, given the lack of guidance from FERC.</p>
<p>These developments led Atlantic Wind to state at the March 31 press conference that the project sponsors anticipated that PJM eventually would modify its planning process to accommodate policy-driven projects, and that AWC would submit a request for approval as part of PJM’s RTEP regime, as soon as that happened.</p>
<p>Meanwhile, however, a number of PJM member utilities, including the PSE&amp;G Companies, the PPL Companies, Rockland Electric and Baltimore Gas &amp; Electric, have urged PJM to jettison these plans, arguing that it’s unwise to attempt to go forward without clear guidance from FERC.</p>
<p>Even in New Jersey, where Gov. Chris Christie recently signed the <i>Offshore Wind Economic Development Act</i> to promote offshore wind projects for the Garden State, the state’s Board of Public Utilities has taken sides against PJM in trying to augment grid planning rules:</p>
<p>“It would be inappropriate,” the BPU stated in commenting on FERC’s NOPR initiative, “to permit PJM members to set public policy that is presumably based on state and federal goals and regulations.”</p>
<p>In a letter dated March 28 and addressed to the PJM Board of Managers, PSE&amp;G, PPL, Rockland and BG&amp;E asked PJM to defer its proposed changes to the RTEP process “until there is greater legal certainty and clarity on this issue.”</p>
<p>That drew a response from Exelon’s v.p. for transmission operations and planning, Susan Ivey, who wrote to PJM’s Board Chairman Howard Schneider on April 4:</p>
<p> </p>
<p>“In Exelon’s opinion, the question is not whether PJM should include public policy assumptions in development of the RTEP, but how to do so.”</p>
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<div class="field-label">Tags:&nbsp;</div>
<div class="field-items">
<a href="/tags/acp">ACP</a><span class="pur_comma">, </span><a href="/tags/apex-offshore">Apex Offshore</a><span class="pur_comma">, </span><a href="/tags/atlantic-grid-development">Atlantic Grid Development</a><span class="pur_comma">, </span><a href="/tags/atlantic-wind-connection">Atlantic Wind Connection</a><span class="pur_comma">, </span><a href="/tags/brattle-group">Brattle Group</a><span class="pur_comma">, </span><a href="/tags/brenda-pennington">Brenda Pennington</a><span class="pur_comma">, </span><a href="/tags/bryan-lee">Bryan Lee</a><span class="pur_comma">, </span><a href="/tags/chris-christie">Chris Christie</a><span class="pur_comma">, </span><a href="/tags/citi">Citi</a><span class="pur_comma">, </span><a href="/tags/commission">Commission</a><span class="pur_comma">, </span><a href="/tags/cwip">CWIP</a><span class="pur_comma">, </span><a href="/tags/david-dismukes">David Dismukes</a><span class="pur_comma">, </span><a href="/tags/dc">DC</a><span class="pur_comma">, </span><a href="/tags/deepwater-wind">Deepwater Wind</a><span class="pur_comma">, </span><a href="/tags/dominion">Dominion</a><span class="pur_comma">, </span><a href="/tags/exelon">Exelon</a><span class="pur_comma">, </span><a href="/tags/federal-energy-regulatory-commission">Federal Energy Regulatory Commission</a><span class="pur_comma">, </span><a href="/tags/federal-power-act">Federal Power Act</a><span class="pur_comma">, </span><a href="/tags/ferc">FERC</a><span class="pur_comma">, </span><a href="/tags/ferc-order-679">FERC Order 679</a><span class="pur_comma">, </span><a href="/tags/garden-state-offshore-energy-project">Garden State Offshore Energy Project</a><span class="pur_comma">, </span><a href="/tags/google">Google</a><span class="pur_comma">, </span><a href="/tags/gov-chris-christie">Gov. Chris Christie</a><span class="pur_comma">, </span><a href="/tags/hvdc">HVDC</a><span class="pur_comma">, </span><a href="/tags/interconnection">Interconnection</a><span class="pur_comma">, </span><a href="/tags/johannes-pfeifenberger">Johannes Pfeifenberger</a><span class="pur_comma">, </span><a href="/tags/lmp">LMP</a><span class="pur_comma">, </span><a href="/tags/markian-melnyk">Markian Melnyk</a><span class="pur_comma">, </span><a href="/tags/maryland-energy-administration">Maryland Energy Administration</a><span class="pur_comma">, </span><a href="/tags/new-jersey">New Jersey</a><span class="pur_comma">, </span><a href="/tags/new-jersey-division-rate-counsel">New Jersey Division of Rate Counsel</a><span class="pur_comma">, </span><a href="/tags/new-jersey-offshore-wind-economic-development-act">New Jersey Offshore Wind Economic Development Act</a><span class="pur_comma">, </span><a href="/tags/nopr">NOPR</a><span class="pur_comma">, </span><a href="/tags/oacp">OACP</a><span class="pur_comma">, </span><a href="/tags/old-dominion-electric-cooperative">Old Dominion Electric Cooperative</a><span class="pur_comma">, </span><a href="/tags/order-679">Order 679</a><span class="pur_comma">, </span><a href="/tags/osweda">OSWEDA</a><span class="pur_comma">, </span><a href="/tags/outreach">Outreach</a><span class="pur_comma">, </span><a href="/tags/payment">Payment</a><span class="pur_comma">, </span><a href="/tags/pjm">PJM</a><span class="pur_comma">, </span><a href="/tags/ppl">PPL</a><span class="pur_comma">, </span><a href="/tags/rps">RPS</a><span class="pur_comma">, </span><a href="/tags/rtep">RTEP</a><span class="pur_comma">, </span><a href="/tags/samuel-newell">Samuel Newell</a><span class="pur_comma">, </span><a href="/tags/schneider">Schneider</a><span class="pur_comma">, </span><a href="/tags/stefanie-brand">Stefanie Brand</a><span class="pur_comma">, </span><a href="/tags/susan-ivey">Susan Ivey</a><span class="pur_comma">, </span><a href="/tags/tep">TEP</a><span class="pur_comma">, </span><a href="/tags/brattle-group-0">The Brattle Group</a><span class="pur_comma">, </span><a href="/tags/transmission">Transmission</a><span class="pur_comma">, </span><a href="/tags/wind">Wind</a> </div>
</div>
Sun, 01 May 2011 04:00:00 +0000puradmin14107 at http://www.fortnightly.com